Understanding the interrelationships between the alveolar epithelium and the underlying mesenchyme is critical for the development of new strategies for the treatment of pulmonary fibrosis. Type II cell hyperplasia is a universal hallmark of pulmonary fibrosis. A reasonable hypothesis is that therapy directed at the alveolar type II cell can affect the underlying fibrotic process. One approach is to use KGF (keratinocyte growth factor) to stimulate the proliferation of the alveolar epithelial cells without stimulating the underlying fibroblasts. KGF would be expected to hasten re-epithelialization caused by loss of type I cells and produce a population of highly active type II cells, termed hypertrophic type II cells. A second approach would be to stimulate the epithelial cells to produce antifibrogenic factors. These factors might induce apoptosis in fibroblasts or inhibit matrix production. A final strategy would be to stimulate putative alveolar epithelial stem cells, which based on the biology of other epithelial systems, are likely to exist. In this proposal we seek to demonstrate that (1) exogenous KGF or KGF delivered through gene therapy can prevent the development of pulmonary fibrosis in rats and later in mice, that (2) alveolar type II cells produce factors that induce apoptosis and inhibit matrix production in fibroblasts, that (3) serum levels of SP-D, a marker produced by hyperplastic type II cells and stimulated by KGF, is a useful predictive factor of the fibrotic process for future clinical trials, and that (4) primitive epithelial stem cells can be identified and characterized. The later studies will use embryonic stem cells that can be induced to express the type II cell specific marker SP-C. The regulation of the development of differentiation in the fetal lung is very likely to be similar to the regulation of epithelium during repair in the adult lung. These studies should define the biologic interrelationship between alveolar type II cells and mesenchymal cells during the development of pulmonary fibrosis and provide the experimental background for new therapies to treat pulmonary fibrosis.